Why
India doesn't print a ton of money to fight poverty
Yahoofinance
The coronavirus pandemic has pushed the
world into a recession. Major global economies are responding to the COVID-19
induced recession by adopting unorthodox measures.
The United States, the European Central
Bank, Japan, and even emerging economies such as Turkey and Indonesia are
printing money to bring economies back to life.
However, India has refrained from doing
so.
After the Q1 financial year 2020-21 GDP
deceleration of 23.9%, the highest among major economies of the world, the
chorus is growing in India for monetisation of the fiscal deficit: in layman’s
language, printing more money to boost the ailing economy. Especially, because
the repercussions of not spending to support the economy could be irreparable.
But before that, let’s understand a few
things:
What is fiscal deficit?
Fiscal deficit is the difference
between the total revenue or income of the government less its
expenditure.
For FY 2019-20, the central
government’s receipts through income taxes, GST and other receipts were Rs
19.32 lakh crore, while its expenditure on schemes, subsidies, and
infrastructure, interest payments were Rs 26.98 lakh crore.
Hence, the fiscal
deficit was Rs 7.66 lakh crore. It is expressed as a percentage of the GDP. The
figure was 3.8% in FY 2019-20.
Take the case of an
individual, if she spends more than she earns, how would she make up for the
difference? Well, she would need to borrow, from friends or banks or
moneylenders.
Similarly, the
government also borrows money from the market to finance the fiscal deficit. It
usually issues bonds which are subscribed by individuals and institutional
investors.
They lend money to the
government with the promise of future payment. These bonds carry a lower rate
of interest than what is available to corporates/individuals, as they are
considered as risk free.
The central government
has hiked the market borrowing for this year to Rs 12 lakh crore from Rs 7.8
lakh crore presented in the Union Budget in the wake of the coronavirus
pandemic, implying fiscal deficit will shoot its target.
Why
do governments spend more than they earn?
Politicians and
policymakers rely on fiscal deficits to expand popular policies/schemes, such
as welfare programmes and public works, without having to raise taxes or cut
spending elsewhere in the Budget, to elicit support during elections.
What
is monetisation of fiscal deficit?
Monetisation of fiscal
deficit refers to the purchase of government bonds by the central bank, i.e.
the Reserve Bank of India.
Since the central bank
creates fresh money by simply printing to buy these bonds, in layman’s
language, monetisation of deficit means printing more money. This helps finance
the spending needs of the government.
The government spends
this money on infrastructure projects which creates jobs, having a multiplier
effect on the economy. This money could be used by the government to provide
more funds for its welfare schemes, NREGA, transfers to Jan Dhan accounts,
etcetera which then provide a fillip to consumption, which has been badly hit
by the pandemic. Consumption, both private and government, accounts for about
70% of India’s GDP.
That’s
great. Why doesn't India just print tonnes of money and distribute to the
populace to ensure nobody is poor?
It’s not easy.
In the past when
countries have tried to get richer by printing money it hasn’t worked. Printing
more money increases money supply in the economy. Now everyone has more money,
more money is chasing goods and services. This leads to an increase in prices
as sellers take advantage of the situation and charge more.
This has happened
earlier in Zimbabwe and Venezuela. The countries suffered from hyperinflation,
in simple terms very high inflation.
In Zimbabwe prices rose
as much as 231,000,000% in a single year in 2008. The paper used probably
became worth more than the banknote denomination printed on it.
Should
the RBI then print money to revive the economy, especially when the stimulus
package announced by the government is deemed insufficient?
Economists are divided
on the issue: while some have cautioned against the move, others say limited
monetisation can be undertaken given the extraordinary situation.
The money received by
the government from the RBI can be used to fund higher spending and protect the
economy, the poor and vulnerable in these abnormal times.
High government
borrowing from the market can raise interest rates and deny credit to the
private sector, reducing the pool of money available to them, termed as
crowding out.
Monetisation of fiscal
deficit/printing of money can avert this situation but there are risks of high
inflation and currency depreciation apart from a general deterioration in
macroeconomic balance.
A section of
economists believes that emerging economies like India have far lesser room to
support local economies than developed markets.
·
In the US, the Federal
Reserve has expanded its balance sheet to $7.1 trillion, up from $4.4 trillion
before the pandemic crisis hit.
·
The Bank of Japan has
pledged unlimited purchases of government bonds and expanded its
exchange-traded fund buying.
·
The European Central
Bank has announced a $1.35-trillion asset purchase programme.
·
In contrast, most
emerging market central banks, including India, are treading cautiously.
“Because
of the peculiarities of the international monetary system, many so-called
emerging economies simply don’t have the wherewithal or the institutional
credibility to take the kind of financial risks that so many developed
countries have done. If, for instance, an emerging country were to embark on
the kind of fiscal expansion Japan has undertaken, markets might panic about
that country. That is the reality." -- Jim O’Neill, Chiar, Chatham House
To sum up, it’s not an
easy decision: one needs to weigh the pros and cons. Also, it's not just an
economic, but a political decision as well.
